Heavy tails and electricity prices
http://www.erasmusenergy.com/articles/153/1/Heavy-tails-and-electricity-prices/Page1.html
Rafal Weron
Associate Editor of Computational Statistics, Journal of Energy Markets, and Surveys in Mathematics and its Applications, his research focuses on risk management and forecasting in the power markets and computational statistics as applied to finance and insurance. His other interests include stochastic modeling, time series, heavy tailed distributions, and computer simulations of highly volatile phenomena. By Rafal Weron
Published on 01/28/2008
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Publication year: 2005
In the first years after the emergence of deregulated power markets it became apparent that for the valuation of electricity derivatives we cannot simply rely on models developed for financial or other commodity markets. However, before adequate models can be put forward the unique characteristics of electricity (spot) prices have to be thoroughly analyzed. In particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of returns. In this paper we first analyze the stylized facts of electricity prices, then present two modeling approaches: jump-diffusion and regime-switching, which to some extent address the pertinent issues.
Published in:
Publication year: 2005
In the first years after the emergence of deregulated power markets it became apparent that for the valuation of electricity derivatives we cannot simply rely on models developed for financial or other commodity markets. However, before adequate models can be put forward the unique characteristics of electricity (spot) prices have to be thoroughly analyzed. In particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of returns. In this paper we first analyze the stylized facts of electricity prices, then present two modeling approaches: jump-diffusion and regime-switching, which to some extent address the pertinent issues.
Heavy tails and electricity prices
In the first years after the emergence of deregulated power markets it became apparent that for the valuation of electricity derivatives we cannot simply rely on models developed for financial or other commodity markets. However, before adequate models can be put forward the unique characteristics of electricity (spot) prices have to be thoroughly analyzed. In particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of returns. In this paper we first analyze the stylized facts of electricity prices, then present two modeling approaches: jump-diffusion and regime-switching, which to some extent address the pertinent issues.